Saturday, November 11, 2006

In advising companies that are acquisition candidates, two of the questions that I most frequently receive are:

1. What should I expect from the due diligence process?and2. How can I best protect my confidential information while still moving the process forward?

I addressed #1 last time (see Due Diligence, Part 1) and will cover Part A of #2 in this post, with the remainder in the next two posts.

How can I best protect my confidential information while still moving the process forward?

Potential acquirers are typically trustworthy and sincere in their intent when conducting due diligence, with making an acquisition the goal rather than gathering competitive intelligence. However, some may enter the process with both goals, and a few may actually have bad intentions.

With that in mind, there are three actions that a company can take to decrease the odds of wasting time and unnecessarily parting with sensitive information, while not overly encumbering the acquisition process:

A. Gauge the seriousness of the potential acquirer (covered below)B. Stage the flow of information (to be covered in the next post)C. Be on the lookout for warning signs (to be covered in a future post)

A. Gauge the seriousness of the potential acquirer

In addition to the intentions of the potential acquirer, judging their seriousness at the beginning of the process and throughout can save a target company lots of time and frustration. In my experience, frequently a company would like to make an acquisition but simply is not in a position to do so.

There are number of easy ways to test for this, including the following.

Evaluate the company’s financial ability to make an acquisition. Do they have the cash to make a cash deal? Do they already carry a large debt burden, or do they have the ability to borrow to finance the deal? In the case of a public company, it is feasible to consummate a stock deal? The company should be able to provide a clear and realistic plan on how they would structure and finance the deal.

Evaluate the means of initial contact. Was it through a senior executive or board member, or through a person with less authority? If was through an intermediary, how credible is the intermediary, and is it formally representing the company?